Playing by the Rules When Forming an LLC

Why Form an LLC?

If you own a business, particularly a high liability business, forming
an LLC is a great option to afford yourself protection from personal liability
in the event of a lawsuit, but simply forming an LLC will not protect
you from personal liability. You must play by the rules. So, what are
the rules?

The Rules

In order to prevent a plaintiff from holding you personally liable for
damages in a lawsuit involving your LLC or to prevent a plaintiff from
attaching assets in your personal name, you must play by the following rules:

1. You MUST draft an operating agreement. An operating agreement sets forth
the manner in which your business operates, i.e., Who are the managing
members? How often do you meet? Where are the minutes located?;

2. You MUST follow the rules. Just drafting an operating agreement means
nothing unless you follow the operations set up in the agreement. For
example you must actually take minutes when you meet and keep them accessible
and meet at least the minimum number of times set forth in the operating
agreement;

3. You MUST keep your LLC assets and liabilities separate from your personal
assets. This simply means setting up a separate account in the LLC’s
name where all of your income and expenses of the LLC flow through;

4. Finally, you MUST properly title all of the LLC’s assets in the
name of the LLC.

The Consequences

If you fail to follow the rules set forth above there will be consequences
if your LLC gets sued. The consequence that undermines the whole point
of setting up an LLC is that the corporate veil is pierced and you are
held personally liable for damages.

If you own a business and want to discuss an LLC further, call my office
today for a free consult. Drafting an operating agreement for your LLC
is relatively inexpensive, not having one could be the most expensive
mistake of your life.

The information on this website is for general information purposes only.
Nothing on this site should be taken as legal advice for any individual
case or situation. This information is not intended to create, and receipt
or viewing does not constitute, an attorney-client relationship.

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